Crowdfunding: Medium of Finclusion & Investor’s choice

OR
Crowdfunding: Enhancement of Financial Inclusion and Investment
Environment

Research Proposal Submitted to: Sir Sohaib

Submitted by: Aqsa Hassan (MBA-Finance & Investment – 3.5 years)

Synopsis

KEYWORDS:
Crowdfunding, Finclusion, Alternative Finance, Regulatory Sandbox, Innovation, Fintech,

BACKGROUND:

Finclusion (Financial Inclusion):

Financial inclusion is defined as the availability and equality of opportunities to
access financial services. It refers to a process by which individuals and businesses can access
appropriate, affordable, and timely financial products and services. These include banking, loan, equity,
and insurance products.

Alternative Finance:
Alternative finance refers to financial channels, processes, and instruments that have emerged outside of
the traditional finance system such as regulated banks and capital markets. Examples of alternative
financing activities through 'online marketplaces' are reward-based crowdfunding, equity
crowdfunding, revenue-based financing, online lenders, peer-to-peer consumer and business lending,
and invoice trading third party payment platforms.

Crowdfunding:
Crowdfunding has been touted as a financial innovation, a FinTech, the fastest growing financial
industry, and the next big thing in finance. ―In the financial inclusion context, crowdfunding refers to a
market-based financing technique where funds are raised from large numbers of individuals or legal
entities in small amounts, bypassing traditional financial intermediaries, and using mobile phones and
online web-based platforms to connect with borrowers, whether to fund a business, a specific project, or
other needs.‖ It is a form of crowdsourcing and alternative finance. In 2015, over US$34 billion was
raised worldwide by crowdfunding. The modern crowd funding model is generally based on three types
of actors: the project initiator who proposes the idea or project to be funded, individuals or groups who
support the idea, and a moderating organization (the "platform") that brings the parties together to launch
the idea.
Crowdfunding has the potential to transform retail financial services as the use of technology, increasing
connectivity through mobile phones and other devices, the legal and regulatory framework, and
constantly changing economic conditions allow new and innovative firms to compete with incumbents.
This competition could foster economic growth and entrepreneurship, especially in countries with less
developed financial systems. It can play an important role in improving financial inclusion if an enabling
and safe environment is in place.

Types of Crowdfunding
The most common classification of crowdfunding features four main categories—donation, reward, debt,
and equity.
Donations-based crowdfunding allows individuals (donors) to send money to people (or projects) in need
(beneficiaries), with no financial (return) consideration in exchange for their money. Reward-based
crowdfunding allows funders (donors) to contribute to campaigns in exchange for a nonfinancial reward.
Rewards often take the form of tokens of appreciation or the pre-purchasing of a product or service (the
actual invention) according to the contributed amount. Debt crowdfunding allows funders (lenders) to
directly lend to fundraisers or invest in debt obligations issued through a platform. Debt crowdfunding is
also known as lending-based crowdfunding, marketplace lending, or person-to-person (P2P) lending—
terms that are not as broad as debt crowdfunding. Equity crowdfunding allows individual and institutional
investors to invest in unlisted entities (issuers) in exchange for shares in the entity. By definition, equity
crowdfunding serves funding of legal entities that can raise funds by selling their equity. It is suitable for
start-ups and SMEs, in particular. If an investment target is reached, the deal is closed between the pool of
funders, the issuer, and the platform.

RATIONALE:

Crowdfunding in Pakistan:
In Pakistan, Crowdfunding is presumed to be a novel concept with huge potential of growth within.
Currently, startups like transparent hands, Seedout, Pink ribbon, care foundation are being operated under
donation- based crowdfunding model but no such significant number of equity or debt based
crowdfunding model is in place which can actually throw an impact over status of Finclusion in Pakistan..
As Pakistan’s strategic focus lies heavily in growth of export oriented businesses, information technology,
success of SMEs and ultimately leading to Financial Inclusion, this proposed medium of access to finance
i.e. crowdfunding can bring the targets closer to achievement. Despite the state’s emphasis over SME
sector growth and numerous endeavors to bring people under the net of financial access, there still lies a
gap which needs to be fulfilled (53% people in Pakistan are financially excluded : Source: Finclusion,
SBP). The proven success of this new theme of finance specially in developing countries & emerging
markets like ours shows us the light at the end of the tunnel. Recently, regulatory body of the country
SECP has also taken few initiatives to provide grounds to this alternative finance method keeping in
consideration the probability of success in our environment. They have developed a regulatory sandbox
which provides the initial/pilot framework describing the process of submission of innovative ideas, their
live testing for 6 months’ in real-time scenario, measures to protect investors by setting up threshold
limits and the like which is a positive sign as sound public policy has a proven impact over success of
crowdfunding models in various countries.

Gaps/Problems/Issues Observed:
Since crowdfunding is a relatively new phenomenon in Pakistan due to which it has not received due
weightage of focus yet. There exists a room to disseminate knowledge about this financing medium
among masses through extensive research on this topic. Few researches have been carried out but they
mostly focus on the ―Fundraiser‖ part i.e. growth of startups through Some key issues/gaps/questions that
we aim to cover with this research are as follows:
 Does there exist potential for this proposed medium of financing in Pakistan?
 What is the current regulatory framework for crowdfunding startups?
 As described above, protecting regulatory environment is necessary for crowdfunding to help
grow finclusion. Is regulatory environment in Pakistan enabling enough to ignite such growth
potential?
 What will influence people to invest in such high risk projects?
 What are the participating factors that determine the success of crowdfunding projects?
 Will crowdfunding really help in enhancing finclusion in Pakistan?
 Will crowdfunding facilitate financially excluded people being a non-traditional source of
funding?

Method Outline:
Type of Study: Since the topic has enough room for exploration & potential, explanatory and empirical
research methods will be employed to gauge the authenticity of ideas.
Type of Data: First- hand (primary) data obtained from potential/ general people/ proposed
crowdfunders. Interview of SECP authorities to track the progress of crowdfunding regulations regime is
also proposed but subject to material hindrances such as unavailability, lack of access to researchers.
Qualitative/Quantitative: Since research is profoundly inclined towards subjective elements, we will
primarily focus on qualitative data set.
Geographical Study: Study will be limited to the vicinity of Pakistan.
Target Group: Not specific as of now.
Objectives:
In such times & scenario where macro – level policies are restrictive & traditional FIs are reluctant to
issue new loans, existing/potential businesses/ startups suffer. Higher transaction costs and complexity of
the regulatory process is also the reason why entrepreneurship could not thrive here in our country.
Through this research, we aim to highlight an available alternative source of finance that will at least, if
not substitute existing source of financing (banks, private equity) but will supplement the existing
environment and will help alleviating financial exclusion. The borderless nature of crowdfunding is also
one of the most appealing features of it that provides Startups/SMEs an opportunity to have a global
outreach where there exist more developed markets.

References:
https://en.wikipedia.org/wiki/Crowdfunding
https://www.cgap.org/sites/default/files/Working-Paper-Crowdfunding-and-Financial-Inclusion-Mar-
2017.pdf
https://www.igi-global.com/chapter/crowdfunding/250468
https://www.worldbank.org/en/topic/financialinclusion/overview
https://www.sbp.org.pk/Finc/finc.asp
https://heinonline.org/HOL/LandingPage?handle=hein.journals/washlr91&div=24&id=&page=